Volatility and financial market

Currently I am a bit busy on my work and moreover, there is not much special viewpoints that I cannot spend much time to write the essay. I have created a question mark on the Hong Kong economy in my last essay, but it is nothing special. To simplify this, it can be the mixture of Chinese and US economy with more weight on Chinese side. On the other hand, I would like to share some alternative points.

Attached please find two figures of the VIX, which is the implied volatility for the S&P 500 index options. The first one is in 1-year span, while the last one is in maximum time span (Source of figures: finance.yahoo.com).

The VIX has some indication, i.e. the fear index such that if it is high, the market is at the most terrific moment such that some investors rely on this index as contrarian indicator to trade. In terms of the shorter time span, we can see that there is a mere double top (or even triple top) developed in the VIX. One can feel confident to buy the US stock again, at least for the rebound.

What I want to emphasize is the second figure, where it has the significant implication on the stock market. It seems that when the VIX is high, the US stock market is at the moment from 3rd stage of bullish trend to 2nd stage of bearish trend. When the VIX is low, the US stock market is at the moment from 3rd stage of bearish trend to 2nd stage of bullish trend. Is there any explanation? It is not only the excessive fear, but also the enormous greed fuelling the second moment of the stock price.

Regarding the overseas financial market, many are arguing whether the decoupling exists or not*. Regardless of the validity of the decoupling of the economy or stock market, the volatility of the financial market, even among stocks, commodity and foreign exchange, should hardly be decoupled, as we have already observed in these years. If you are the writers of the options, notice this.

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* Personally, I do not agree that there is significant decoupling when there is international trade and with some additional notes that there should be time-lag for the decline, combining some points in view in 2008 I. Despite this, I am discreetly optimistic about Chinese economy in long-term.